Do we question enough our own decision-making?
Credit to Author: RAOUL A. VILLEGAS | Date: Thu, 11 Apr 2019 16:18:18 +0000
Business leaders spend enormous amount of time assessing strategy, allocating resources, and implementing decisions to gain advantage in the marketplace. Regardless of all of the talent, process, technology, time and capital brought to bear, the most important resource perhaps remains to be the process itself.
Have we really looked at how we decide and whether our decision-making process handicaps us because we are unaware that it does? The duo of Daniel Kahneman (economist and psychologist) and Amos Tversky (mathematical psychologist) did ground breaking work in the field of behavioral economics that led to the former winning the Nobel Prize for Economics in 2002.
In their collaboration, the academic team identified several cognitive biases that affect how people decide in their everyday lives. Whether business leaders are aware or not, these biases influence how they make choices. Eliminating these biases may lead to more effective decision-making.
Biases that affect decision-making
Three types of cognitive biases, among others, might frequently impact decision-making.
First, affinity bias affects leaders in that they might be more favorably inclined towards placing more value on the input of people most similar to themselves. Unwittingly, the seasoned executive may weigh the input of subordinates closest to him in terms of background and experience, even if there are other team members with direct and deeper domain knowledge.
Affinity bias may frequently creep into hiring. The savvy leader should be aware of this and may take measures to bring together a diverse team to neutralize it.
The confirmation bias is another decision-making pothole into which many intelligent and capable leaders fall. Professional knowledge workers, like consultants, may fall into the trap of seeking only information and analysis that confirm their preconception. The data points that do not confirm the analysis get ignored, and the rigor of the work might become questionable.
The astute leader actually challenges his own analysis, and invites others to do the same to ensure that different angles of analysis, along with the corresponding solutions, have been considered.
The hindsight bias also influences leaders and decision makers who have known all along how things will turn out. When significant industry developments and disruptions occur, the survivors tend to look back at what happened, and make the connections to convince themselves that they have known what would happen. This is usually not the case at all. Regardless, in the aftermath, many “experts” would always emerge.“I saw it all the way!” they’d say.
The self-aware leader, aware of hindsight bias, takes care to examine the disruption and its effects. Moreover, he acknowledges with blunt intellectual honesty what information has really been available at the time decisions have been made (or when they haven’t been made), and assesses whether it has really been possible to have acted differently.
Overcoming cognitive biases
There are other cognitive biases besides these three, and all of them conspire to impair the judgment and independence of thought – both are so important to effective leadership and decision-making.The first step to address these biases might be to develop an awareness of such biases, and come up with ways to combat their insidious influence.
One does not have to develop this self-awareness by reading dry academic papers in behavioral economics or cognitive psychology. Two recent books provide a helpful peek into how business leaders recognize their own biases, and how they have overcome them.
The Undoing Project chronicles the collaboration between Kahneman and Tversky, and how they identified these cognitive biases. However, the chapter on the General Manager of the Houston Rockets, and how he has sought to eliminate bias in evaluating NBA talent, is richly illuminating on how far one can go in rooting out systemic decision-making handicaps. He even succeeded in eliminating racial bias (among others) from evaluating basketball talent.
Astroball, the history of how the Houston Astros won the 2017 baseball World Series, provides fertile material in showing how an organization moves from antiquated decision-making models to new processes backed by technology, leavened by human judgment. From losing more than 100 games each season from 2011 to 2013, the Astros achieved a dramatic turnaround in four seasons, winning 103 games and the World Series in four years.
These two books are case studies on how to eliminate cognitive bias, in the applied laboratory of the real world, with verifiable results.The main takeaway one can get from them involves having the growth mindset to question our own decision-making process, and see how we might get better at eliminating our biases and making better quality decisions.
They say that one of the hardest things to do is to see yourself in the mirror and take a deep dive into your own shortcomings. It’s tough because we don’t like looking at our mistakes. However, from there is where the real value and growth springs.
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Raoul Villegas is a Deals and Corporate Finance Executive Director of Isla Lipana & Co.,the Philippine member firm of the PwC network. For more information, please email markets@ph.pwc.com. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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